How to Handle Boot Received During a 1031 Exchange

A 1031 exchange is not a zero sum game. Not everybody wants to do a 100% tax-deferred 1031 exchange. If you want to take some taxable proceeds (boot) during your 1031 exchange, the best time to do that is before the rest of your net proceeds are sent to the intermediary.

In this scenario, you would amend the exchange documents and the closing instructions. Then on the settlement statement, you have the settlement agent (the title company or escrow officer) send the boot to the taxpayer before the rest of the net proceeds are sent to the qualified intermediary. Once the intermediary gets the proceeds, you can’t put your hand in the cookie jar without disrupting your 1031 exchange. The time to receive the boot (if you want to) is when the settlement statement is still in control of the proceeds. Take the boot at the beginning of the closing process if you know what you want.

Alternatively, if you’re not sure how much boot you want to take, you could wait until the exchange period has ended and get your unutilized surplus exchange funds back from the intermediary as taxable boot.

A 1031 Exchange is a Powerful Tool

A 1031 exchange is one of many tools available to taxpayers who want to put themselves in the most tax-advantageous position possible. When you sell your real property in a 1031 exchange you are deferring your capital gains taxes and compounding your wealth over time in a continued investment. As an added bonus, it’s a great way to stimulate the economy and move money into different segments of the real estate market. Learn more about the tax-saving benefits of the 1031 exchange by contacting the qualified intermediaries at CPEC1031, LLC today!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Be Careful What You Choose as Your 1031 Exchange Replacement Property

In a 1031 exchange, you need to be careful when picking replacement property, as it must be considered to be real property.

There are other securitized real estate investments that are considered to be an interest in real property. These are often called a Delaware Statutory Trust or “DST.”

Delaware Statutory Trust Rev. Rul. 2004-8618 (the DST guidance) addresses whether a DST will be treated as an investment trust or business entity for federal income tax purposes.

If the DST is treated as an investment trust, interests in the DST will be treated as interests in the property owned by the DST for purposes of section 1031, and therefore beneficial owners can exchange their relinquished property for interests in the DST.

See: 2004-2 C.B. 191

As you may now know the IRS generally won’t allow one to exchange from real property into a partnership or even certain de facto partnership disguised as a tenants-in-common arrangement.

The newest Treasury Regulation that defines what real property is states that:

(5) Intangible assets—(i) In general. Intangible assets that are real property for purposes of section 1031 and this section include the following items: Fee ownership; co-ownership; a leasehold; an option to acquire real property; an easement; stock in a cooperative housing corporation; shares in a mutual ditch, reservoir, or irrigation company described in section 501(c)(12)(A) of the Code if, at the time of the exchange, such shares have been recognized by the highest court of the State in which the company was organized, or by a State statute, as constituting or representing real property or an interest in real property; and land development rights. Similar interests are real property for purposes of section 1031 and this section if the intangible asset derives its value from real property or an interest in real property and is inseparable from that real property or interest in real property. The following intangible assets are not real property for purposes of section 1031 and this section, regardless of the classification of such property under State or local law—

(A) Stock not described in paragraph (a)(5)(i) of this section, bonds, or notes;

(B) Other securities or evidences of indebtedness or interest;

(C) Interests in a partnership (other than an interest in a partnership that has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K);

(D) Certificates of trust or beneficial interests; and

(E) Choses in action.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Dealing with Incidental Personal Property in a 1031 Exchange

In a 1031 exchange, you have to buy like-kind real estate. Let’s say you sold an apartment building and you bought a bigger apartment building. That would be fine in a 1031 exchange because you’re exchanging like-kind real estate for other like-kind real estate.

But what if some of your 1031 exchange funds are being used to pay for incidental personal property that goes along with the apartment building? Perhaps there are window air conditioners, tools, or lawnmowers. These items aren’t real estate but may be thrown in with the deal and would customarily be sold with the building.

Identification Rules

You must identify your 1031 replacement property. If you’re receiving some incidental items as a part of the purchase, do you have to identify those items? As long as those incidental items don’t amount to more than 15% of the real estate you’re identifying, then you don’t have to worry about it from an identification point of view. Notice that we’re talking about 15% of the real estate, not 15% of the total deal. So you have to be careful. This is a trap for the unwary.

Pro Tip

If you’re getting used air conditioners, appliances, or other equipment, the IRS will generally respect a written allocation of value between the parties. It might be a good idea to formally allocate that all of these incidental personal property items are going to be sold to you at garage sale prices out of pocket – just out of an abundance of caution.

Questions About 1031 Exchanges?

Do you have questions about the 1031 exchange process? If so, you’ve come to the right place! CPEC1031, LLC provides 1031 exchange services for US taxpayers looking to defer capital gains taxes on the sale of qualifying real estate. We focus solely on like-kind exchanges and have over two decades of experience working in the 1031 exchange industry. Let us put our knowledge and expertise to work for you and help ensure your 1031 exchange is successful. Contact us today to learn more and schedule a time to discuss.

•  Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

How to Deal with Loan Acquisition Fees in a 1031 Exchange

One item that taxpayers often think they should be able to pay out of the 1031 exchange proceeds are the costs associated with getting your new loan. However, the IRS looks at this financing arrangement between the taxpayer and the bank as a distinct and separate asset. It’s kind of like a sidecar that’s attached to the real estate itself.

You write off the cost of the loan over the life of the loan, not over the depreciation schedule of the real estate. So when you need to pay any lender fees associated with this separate asset (like a rate lock fee for example), those are items that you may want to pay out of pocket rather than with 1031 exchange funds. Even though the G(7) guidelines may indicate that these items could be paid with 1031 exchange funds, it’s probably safest to just pay these items using non-1031 exchange funds.

Continue Your Investment with a 1031 Exchange

Defer your capital gains taxes when selling real estate and continue your investment with a 1031 exchange! Section 1031 of the Internal Revenue Code is a powerful tool that any US taxpayer can use to build wealth. Talk to the professionals at CPEC1031, LLC today to discuss the details of the 1031 exchange process and see if your property is a good fit for 1031 treatment. Our primary office is located in downtown Minneapolis, but we work with taxpayers throughout the state of Minnesota as well as the United States at large. 

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Where do the 1031 Exchange Deadlines Come From?

After the Starker case in the 1970s, the IRS got authorization from Congress to start writing some regulations with the goal of putting up some guardrails around 1031 exchanges. In the 1980s, they implemented the 45 day identification period and the 180 day exchange period.

The Importance of Nailing Down Your Closing Date

It’s essential to know your closing date because these time periods track off of that date. Sometimes we see closing statements where the print date, the close date, and the disbursement date are all different. In this situation it can be difficult to pin down the actual date of closing for 1031 exchange purposes. For the mercy of your intermediary and your accountant, make sure you emphasize the exact date of transfer on your settlement statement.

The date of your closing is day zero (you don’t count it towards your 1031 time frames). Both your 45 day identification clock and your 180 day exchange clock run concurrently after the date of closing. You don’t get 45 days and then another 180 days. They run together.

A trap for the unwary is that you may not get your full 180 days if your federal income tax deadline pops up within that 180 day period. If you started your exchange late in the year, you may not get your full exchange period unless you extend your tax filing deadline.

Contact a Qualified Intermediary at CPEC1031, LLC

To get hep with your next 1031 exchange, contact a qualified intermediary at CPEC1031, LLC today. Our team has decades of experience facilitating like-kind exchange transactions across the United States. Let us put our experience to work on your next exchange and ensure you defer 100% of your capital gains taxes. We are standing by and ready to answer all of your 1031 exchange related questions. You can find us at our primary offices, which are located in the heart of downtown Minneapolis, MN.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved